Liquidity conditions in China’s money markets will tighten severely in the first month of 2020, requiring an earlier policy response from the PBOC. The Chinese New Year holiday arrives on January 24, so liquidity will tighten in the first three weeks of January due to holiday-related cash demand, tax payments, hefty volumes of bank loans, local government bond issuance, and maturing negotiable certificates of deposit (NCDs).
Policy-makers pledged to maintain reasonably ample liquidity conditions at the Central Economic Work Conference, so we expect the PBOC will continue its easing course with a pre-holiday RRR cut, perhaps as early as January 6, to facilitate local government bond issuance. A medium-term lending facility (MLF) rate cut can also be expected in January, given the importance of reducing funding costs for real borrowers.
